Nod for Qantas tie-up - strings attached

The competition regulator has given a tentative nod of approval to Qantas’s close alliance with Emirates but knocked the airlines back on their request for a 10-year timeframe for their deal.

In a boost to the Australian airline’s fortunes, the Australian Competition and Consumer Commission today released a draft ruling proposing to allow the airlines to co-operate on passenger and freight operations across their networks.

Emirates chief Tim Clark and and Alan Joyce from Qantas at the announcement of their partnership in September. Photo: Ben Rushton

But the regulator has proposed to limit the deal to five years because of concerns about the impact of the alliance on airline competition between Australia and New Zealand.

It warned that their main competitors, Air New Zealand and Virgin Australia, were "unlikely to sufficiently constrain the alliance in the event that the alliance decided to reduce or limit growth in capacity", resulting in rising air fares on the trans-Tasman routes.

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Competition on many routes on which the two flew would ‘‘mitigate the public detriment" but Mr Sims said the ACCC was particularly concerned about its impact on the trans-Tasman route.

‘‘On the overlapping routes between Australia and New Zealand, the ACCC is concerned that the alliance may have an increased ability and incentive to reduce or limit growth in its capacity in order to raise airfares,’’ he said.

‘‘Therefore, the ACCC is proposing a condition to restrict the ability of the alliance in this regard.’’

As a result, the regulator has proposed to grant the alliance for five years, not the 10 years that the airlines had requested in their application.

Qantas and Emirates have guaranteed that they will not reduce combined capacity on the trans-Tasman. The pair’s market share on the route is about 40 per cent.

Qantas shares rose 1.5 cents to a six-month high of $1.465 in early trade following the ACCC's draft ruling. Investors had expected the regulator to indicate its approval of the deal.

Analysts have estimated that the deal is worth as much as $150 million in pre-tax earnings to Qantas.

CBA equities analyst Matt Crowe said investors had expected the regulator’s draft ruling to be in favour of the deal because it was a ‘‘very competitive industry’’.

‘‘We would be extremely surprised if the final determination [from the ACCC] is any different,’’ he said.

Mr Crowe said it had probably been a ‘‘bit of wishful thinking’’ on the part of Qantas and Emirates to expect the regulator to propose granting approval for 10 years.

The regulator will not release its final ruling until March, but the so-called draft determination gives a clear idea of the competition regulator’s position on the proposed tie-up.

Welcoming the draft ruling, the Qantas chief executive, Alan Joyce, said the airlines put a strong case to the competition regulator that outlined the benefits of the alliance.

‘‘We will now focus on responding to the issue raised by the ACCC in relation to the trans-Tasman as we move to securing final approval of this landmark partnership,’’ he said.

Aspects of the deal still needs approval from regulators in New Zealand and Singapore.

New Zealand’s Transport Minister, Gerry Brownlee, will also decide whether the two airlines can form an alliance on the trans-Tasman route.

Qantas’s revenue-sharing agreement with British Airways on the kangaroo route to Europe was also approved for five years, while Virgin Australia and Air New Zealand’s tie-up on the trans-Tasman routes has anti-trust approval for three years – two years less than the airlines had sought.

The Qantas-BA alliance will end in March, just before the Australian airline officially teams up with Emirates (provided they gain final approval from the ACCC).